Is Ovzon (STO:OVZON) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Ovzon AB (publ) (STO:OVZON) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ovzon

What Is Ovzon's Net Debt?

As you can see below, at the end of March 2024, Ovzon had kr693.0m of debt, up from kr466.0m a year ago. Click the image for more detail. However, because it has a cash reserve of kr172.0m, its net debt is less, at about kr521.0m.

How Strong Is Ovzon's Balance Sheet?

We can see from the most recent balance sheet that Ovzon had liabilities of kr121.0m falling due within a year, and liabilities of kr682.0m due beyond that. Offsetting this, it had kr172.0m in cash and kr24.0m in receivables that were due within 12 months. So it has liabilities totalling kr607.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Ovzon has a market capitalization of kr2.32b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ovzon can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Ovzon made a loss at the EBIT level, and saw its revenue drop to kr312m, which is a fall of 4.9%. We would much prefer see growth.

Caveat Emptor

Importantly, Ovzon had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr94m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr645m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Ovzon (including 1 which is a bit unpleasant) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.